3 Steps in Preparing a Recall Risk Mitigation Plan

Despite improvements in food safety standards over the last two decades, it appears foodborne illness continues to be on the rise. In December 2012, the FDA reportedly discovered Salmonella at an Indiana farm that, less than a year ago, had recalled all of its cantaloupes after the FDA linked the fruit to a Salmonella outbreak that allegedly killed three and sickened hundreds. Shortly thereafter, a national bagel restaurant chain issued a recall of a smoked salmon product after its supplier notified the company of a potential bacteria threat. And, several recent studies by the Centers for Disease Control, U.S. Public Interest Research Group, and others suggest these outbreaks are not anomalies.

With food contamination on the rise, even food companies that maintain strict quality control mechanisms and perform extensive due diligence on their suppliers may face the prospect of a recall or product liability claims. And, because food industry supply chains are long and complex, even problems experienced by small ingredient manufacturers can lead to, and recently have resulted in, widespread recalls causing millions of dollars in recall costs and potential tort liability for numerous other food manufacturers, distributors, and retailers. In light of this trend, food companies at all levels of the supply chain should prepare a careful recall risk mitigation plan by following three essential steps.

1. Identify Risk in Sufficient Detail to Enable an Effective Risk Mitigation Strategy

To prepare for a recall or food contamination incident, a company should begin by evaluating the potential risks that the company faces. The company needs to collect information from executives, managers, and other employees with the best knowledge of potential problems. In doing so, companies should focus on the details of these risks, defining them as specifically as possible.

For example, a company might begin with a broad observation of a potential liability or exposure, such as, “We are concerned about a contaminant being introduced into our product through a tainted ingredient.” That observation though should be only the start of the risk assessment. The company should follow up with key personnel, including executives, managers, and others to break this broad observation into more detailed and well-defined elements. For instance, a company’s personnel might break the “tainted ingredient” concern into numerous contributing risks, such as, “We are concerned that we will not be able to recover from a Chinese supplier if one of its ingredients contaminates our product,” or, “We are concerned that other companies in the supply chain will seek to recover costs of recall, including brand damage, if our product becomes contaminated.”

Although a company’s first step to attempt to remedy these risks should be improving the process and standards used in quality control and assurance, companies have to recognize their fears may come to pass even with the best quality controls. Thus, companies must match their specific risks against the risk mitigation strategies and insurance assets they have, or could have, in place.

2. Match Well-Defined Risks with Vehicles for Protection

The purpose of breaking risk into well-defined components is to enable the company to match those risks with the protections the company currently has in place, and also to identify areas where the company may lack adequate protection.

Companies should recognize all of the available vehicles for protecting against risk, such as insurance coverage, indemnities, additional-insured provisions, or other less traditional mechanisms such as bonding or risk pooling. In choosing the right risk transfer strategy, companies must consider that the broadening of food supply chains has decreased the effectiveness of certain traditional risk-spreading techniques.

For instance, two recent Supreme Court decisions have limited federal jurisdiction over suits against foreign manufacturers under certain circumstances. This potential narrowing of federal jurisdiction means food manufacturers may have a more difficult time pursuing claims against foreign ingredient manufacturers, particularly in countries, such as China, that have imposed high obstacles to suing local companies in their courts. These obstacles could render indemnities from those companies less valuable. Similarly, if a foreign supplier has insurance coverage that purports to apply to a domestic food company, it is important to confirm the insurance was purchased in a jurisdiction that allows the domestic company to pursue that coverage. For the same reasons lawsuits are challenging against the supplier, lawsuits against the suppliers’ foreign insurers also may be difficult.

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